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Chapter 20 Summary Gross Domestic Product (pp. 486–470) • GDP, or gross domestic product, is the market value of all the final goods and services produced in a country during a given period. • Afinal good is an item that is bought by its final user, and it contrasts with an intermediate good, which is a component of a final good. • GDP is calculated by using either the expenditure or income totals in the circular flow model. • Aggregate expenditure on goods and services equals aggregate income and GDP. Measuring Canada’sGDP (pp. 471–473) • Because aggregate expenditure, aggregate income, and the value of aggregate production are equal, we can measure GDP by using the expenditure approach or the income approach. • The expenditure approach sums consumption expenditure, investment, government expenditure on goods and services, and net exports. • The income approach sums wages, interest, rent, and profit (and indirect taxes less subsidies and depreciation). • Real GDP is measured using a common set of prices to remove the effects of inflation from GDP. The Uses and Limitations of Real GDP (pp. 474–479) • Real GDP is used to compare the standard of living over time and across countries. • Real GDP per person grows and fluctuates around the more smoothly growing potential GDP. • Incomes would be much higher today if the growth rate of real GDP per person had not slowed during the 1970s. • International real GDP comparisons use PPP prices. • Real GDP is not a perfect measure of the standard of living because it excludes household production, the underground economy, health and life expectancy, leisure time, environmental quality, and political freedom and social justice. Chapter 21 Summary Employment and Unemployment (pp. 490–493) • Unemployment is a serious personal, social, and economic problem because it results in lost output and income and a loss of human capital. • The unemployment rate averaged 7.6 percent between 1960 and 2007. It increases in recessions and decreases in expansions. • The labour force participation rate and the employment-to-population ratio have an upward trend and fluctuate with the business cycle. Unemployment and Full Employment (pp. 494–497) • The unemployment rate is an imperfect measure of the underutilization of labour resources because it excludes some underutilized labour and some unemployment is unavoidable. • The unemployment rate underestimates the underutilization of labour resources because it excludes marginally attached workers and part-time workers who want full-time jobs. • Some unemployment is unavoidable because people are constantly entering and leaving the labour force and losing or quitting jobs; also firms that create jobs are constantly being born, expanding, contracting, and dying. • Unemployment can be frictional, structural, or cyclical. • When all unemployment is frictional and structural, the unemployment rate equals the natural unemployment rate, the economy is at full employment, and real GDP equals potential GDP. • Over the business cycle, real GDP fluctuates around potential GDP and the unemployment rate fluctuates around the natural unemployment rate. The Price Level and Inflation (pp. 498–503) • Inflation is a problem because it redistributes income and wealth and diverts resources from production. • The Consumer Price Index (CPI) is a measure of the average of the prices paid by urban consumers for a fixed basket of consumer goods and services. • The CPI is defined to equal 100 for a reference base period 梒 urrently 2002. • The inflation rate is the percentage change in the CPI from one period to the next. • Changes in the CPI probably overstate the inflation rate because of the bias that arises from new goods, quality changes, commodity substitution, and outlet substitution. • The bias in the CPI distorts private contracts and increases government outlays. • Alternative price level measures avoid the bias of the CPI but do not make a large difference to the measured inflation rate. • Real economic variables are calculated by dividing nominal variables by the price level. Chapter 22 Summary The Basics of Economic Growth (pp. 516–517) • Economic growth is the sustained expansion of production possibilities and is measured as the annual percentage rate of change of real GDP. • Sustained growth transforms poor nations into rich ones. • The Rule of 70 tells us the number of years in which real GDP doubles—70 divided by the annual percentage growth rate. Economic Growth Trends (pp. 518–520) • Between 1926 and 2007, real GDP per person in Canada grew at an average rate of 2.1 percent a year. Growth was most rapid during the 1960s and slowest during the 1980s. • Real GDP per person has grown slightly faster in the United States than in Canada and the four big countries of Europe. • The gap in real GDP per person between Canada and Central and SouthAmerica has narrowed. The gaps between Canada andAfrica and Central Europe have widened. How Potential GDPGrows (pp. 521–526) • The aggregate production function and equilibrium in the aggregate labour market determine potential GDP. • Potential GDP grows if the labour supply grows or if labour productivity grows. • Only labour productivity growth makes real GDP per person and the standard of living grow. Why Labour Productivity Grows (pp. 526–530) • Labour productivity growth requires an incentive system created by firms, markets, property rights, and money. • The sources of labour productivity growth are growth of physical capital and human capital and advances in technology. • Growth accounting measures the contributions of capital accumulation and technological change to the growth of labour productivity. • During the productivity growth slowdown of the 1970s, technological change did not stop growing but its focus changed to coping with energy price shocks and environmental protection. Growth Theories and Policies (pp. 531–535) • In classical theory, real GDP per person keeps returning to the subsistence level. • In neoclassical growth theory, without further technological change, diminishing returns to capital bring economic growth to a halt. • In new growth theory, economic growth persists indefinitely at a rate determined by decisions that lead to innovation and technological change. • Policies for achieving faster growth include stimulating saving and research and development, encouraging international trade, and improving the quality of education. Chapter 23 Summary Financial Institutions and Financial Markets (pp. 544–548) • Capital (physical capital) is a real productive resource; financial capital is the funds used to buy capital. • Gross investment increases the quantity of capital and depreciation decreases it. Saving increases wealth. • The markets for financial capital are the markets for loans, bonds, and stocks. • Financial institutions ensure that borrowers and lenders can always find someone with whom to trade. The Market for Loanable Funds (pp. 548–554) • Investment in capital is financed by household saving, a government budget surplus, and funds from the rest of the world. • The quantity of loanable funds demanded depends negatively on the real interest rate and the demand for loanable funds changes when profit expectations change. • The quantity of loanable funds supplied depends positively on the real interest rate and the supply of loanable funds changes when disposable income, expected future income, wealth, and default risk change. • Equilibrium in the loanable funds market determines the real interest rate and quantity of funds. Government in the Market for Loanable Funds (pp. 555–556) • Agovernment budget surplus increases the supply of loanable funds, lowers the real interest rate, and increases investment and the equilibrium quantity of loanable funds. • Agovernment budget deficit increases the demand for loanable funds, raises the real interest rate, decreases investment in a crowding-out effect, and decreases the equilibrium quantity of loanable funds. • The Ricardo-Barro effect is the response of rational taxpayers to a budget deficit: Private saving increases to finance the budget deficit. The real interest rate remains constant and the crowding-out effect is avoided. The Global Loanable Funds Market (pp. 557–559) • The loanable funds market is a global market. • The equilibrium real interest rate is determined in the global loanable funds market and national demand and supply determine the quantity of international borrowing or lending. Chapter 24 Summary What Is Money? (pp. 568–570) • Money is the means of payment. It functions as a medium of exchange, a unit of account, and a store of value. • Today, money consists of currency and deposits. The Banking System (pp. 571–575) • The banking system consists of the depository institutions (chartered banks, credit unions and caisses populaires, and trust and mortgage loan companies), the Bank of Canada, and the payments system. • Depository institutions provide four main economic services: They create liquidity, minimize the cost of obtaining funds, minimize the cost of monitoring borrowers, and pool risks. • The Bank of Canada is the central bank of Canada. How Banks Create Money (pp. 575–577) • Banks create money by making loans. • The total quantity of money that can be created depends on the monetary base, the desired reserve ratio, and the currency drain ratio. The Market for Money (pp. 578–581) • The quantity of money demanded is the amount of money that people plan to hold. • The quantity of real money equals the quantity of nominal money divided by the price level. • The quantity of real money demanded depends on the nominal interest rate, real GDP, and financial innovation.Arise in the nominal interest rate brings a decrease in the quantity of real money demanded. • In the short run, the Bank of Canada sets the quantity of money to hit a target nominal interest rate. • In the long run, the loanable funds market determines the real interest rate and the quantity of money determines the price level. The Quantity Theory of Money (pp. 582–583) • The quantity theory of money is the proposition that money growth and inflation move up and down together in the long run. • The Canadian and international evidence is consistent with the quantity theory, on average. Chapter 25 Summary Currencies and Exchange Rates (pp. 594–596) • Foreign currency is obtained in exchange for domestic currency in the foreign exchange market. • The nominal exchange rate is the value of one currency in terms of another currency. • The real exchange rate is the price of one country’s real GDP in terms of another country’s real GDP. The Foreign Exchange Market (pp. 597–600) • Demand and supply in the foreign exchange market determine the exchange rate. • The higher the exchange rate, the smaller is the quantity of Canadian dollars demanded and the greater is the quantity of Canadian dollars supplied. • The equilibrium exchange rate makes the quantity of Canadian dollars demanded equal the quantity of Canadia
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